At Buckingham & McGuire, LLC our Denver tax attorneys assist clients in resolving IRS debts, audits and other matters, as well as applying the tax laws to our client’s individual and business issues. All of our tax attorneys have obtained an additional degree in taxation known as an LL.M. Our additional knowledge and education in taxation not only helps resolve IRS issues, but allows us to better assist our clients regarding their business transactions, estate planning and overall tax planning.

When businesses, whether as a seller or a purchaser are going through the acquisition process there is likely to be discussion as to whether the acquisition will be structured as an asset purchase or a stock purchase. There are advantages and disadvantages to a an asset purchase and a stock purchase to both the seller and purchaser however, there may be a means by which to treat a stock purchase as an asset purchase and receive the best of both worlds. The article below has been prepared by a tax attorney and business attorney to discuss certain matters, but please make sure to always discuss your specific issues with your attorney and check for current law and regulations that may have changed.

A stock purchase as a whole is relatively simple as the seller or target corporation’s stock is purchased and the buyer obtains control of the target corporation’s assets with no other action by virtue of owning all of the stock. This being said, the buyer may also inherit liabilities of the target corporation as the business continues and is exposed to prior matters. An asset purchase transaction may be more complex in that the buyer is purchasing the assets and not the stock thus requiring the transfer of title to each asset, which depending upon the facts and circumstances could begin to amount to significant time and cost etc. Further, if the target corporation has special licenses and permits, these may not be transferable to the buyer and could create additional issues under an asset purchase.

As there is good and bad with both structures, a buyer, from a tax perspective will generally prefer an asset purchase because the buyer after the asset purchase can step up the basis in the purchase assets. Therefore, the stepped-up basis in the assets will lead to larger depreciation to lessen taxable income and thus tax at the corporate or personal level. In comparison, when the stock is purchased, the buyer will receive a basis in the stock at the purchase amount and the realization of the tax benefit may not come until the buyer sells the stock using the basis in the stock to offset capital gain. Thus, it is likely the buyer will not “realize” the tax benefit of the stock purchase until a later date than they would under an asset purchase agreement.

There is a means under Internal Revenue Code Section 338 for the buyer to make an election treating a qualifying stock purchase as an asset purchase for federal income tax purposes. Under 338, if the transaction qualifies and the election is made, the transaction is treated as if the buyer purchased the target corporation’s assets for the purchase price of the stock. Therefore, the buyer will end up receiving the more advantageous step-up in basis of the assets.

Under IRC 338 a 338 election can be made (filing form 8023) on a qualifying purchase of 80% or more of the target corporation’s stock. The target and buyer corporations can be either C corporations or S corporations and it is highly recommended you consult with your tax advisors regarding the tax consequences as the election could potentially lead to unanticipated double taxation to the target corporation and shareholders. Under IRC 338(h)(10) a special election can be made for the qualifying purchase of a target corporation’s (C or S corporation) stock when the stock is owned by another corporation. The election cannot be made if individuals own the C corporation’s stock.

Making the 338 elections is a means by which to structure an acquisition as a stock sale, which certainly may have its benefits, but allow the buyer the tax advantage of an asset purchase agreement. This article has been prepared by John McGuire, a tax attorney and business attorney at The McGuire Law Firm. John can be reached at www.jmtaxlaw.com

Many people have questions relating to FIRPTA and the relating withholding tax requirements. Below are common questions and answers related to FIRPTA, but please remember to consult directly with your tax attorney and other tax advisors.

What is FIRPTA?

FIRPTA is a withholding tax requirement for the disposition of a U.S. real property interest by a foreign person that is reported on Form 8288.

Do I need to report it?

If you are a foreigner transferring an interest in any real property in the U.S., you are subject to the FIRPTA requirements. Further, if you are purchasing an interest in any real property from a foreigner, you may be subject to the withholding requirements for tax purposes under FIRPTA.

Who qualifies as a foreigner?

The IRS defines a foreign person as one who is a nonresident alien or a foreign corporation that has not made an election under the Internal Revenue Code section 897(i). As a purchaser, it is your responsibility to determine if the seller is a foreign person based on the definition provided by the IRS which can be broken down into two components. First, an alien is an individual who is not a US Citizen or US national. Second, in order to qualify as nonresident alien, the individual must not have passed the green card test nor the substantial presence test.

Note, the substantial presence test requires that an individual be physically present in the US for at least 31 days during the current year. Additionally, the individual must be present for 183 days during the 3-year period that includes the current year and the 2 years immediately prior. A key element to FIRPTA requires that the real property is located in the US. An alternative to the real property location requirement is an interest in a domestic corporation.

If the seller of the real property is a foreigner and you fail to withhold the appropriate amount of tax, you may be on the hook. It is the purchaser’s duty to determine whether the purchaser from whom he or she is buying an interest in the property is a foreign person or not. As a purchaser, you need to do your due diligence to insure you do not have to withhold any taxes.

How much do I need to withhold?

Recently, there has been a major change in the withholding rate under FIRPTA. Currently, the standard rate is 15% of the realized amount, which is typically the purchase price of the real property. However, if you purchased the real property prior to February 17, 2016, the withholding tax rate is 10%.

May I withhold less than the 15%?

Maybe. If you calculate your tax liability for the disposition of the real property, and this is lower than the reporting requirements under FIRPTA, you may qualify for a lower withholding rate. This is determined by filing out Form 8288-B.

The most common exception to the FIRPTA withholding tax involves the sale or transfer of a residential property not more than $300,00.00. In addition, either the individual or a family member must plan to live at the property for at least 50% of the days that the property is used for the two years following the transfer. If you qualify under this exception, you may not be required to withhold tax under FIRPTA.

The above article has been prepared by John McGuire of The McGuire Law Firm. John Is a tax attorney and business attorney and can be reached at www.jmtaxlaw.com

Many individuals (and businesses) buy stock and securities with the hopes and intent of the securities appreciating and perhaps paying interest or dividends. What determines when an individual is treated as an investor, dealer or trader? Furthermore, what is the tax treatment and proper way to report income and expenses when one is classified as an investor, dealer or trader? The article below has been prepared by a tax attorney to provide information related to the above issues and questions. Please remember to always discuss your specific facts and circumstances with your tax attorney and tax advisors, as this article is for informational purposes only.

The Internal Revenue Service applies different definitions and meanings to the terms investors, dealers and traders. Thus, we will begin with an explanation as to these terms. An investor would typically buy and sell securities in anticipation of the securities appreciating, as well as producing other returns such as interest or dividends. In short, the investor would buy a security and hold the security for personal investment as opposed to conducting these activities in a trade or business. Generally, the investor would hold the securities for themselves and for a substantial period of time. When an investor sells or disposes of the securities, the transactions are reported as capital gain or capital loss on the investors 1040 via a Schedule D. As an investor, capital loss limitations under IRC Section 1211(b) would apply as well as wash sale rules under IRC 1091. Investors may be able to deduct expenses associated with creating the taxable income on their Schedule A itemized deductions. Further, interest paid for money to buy investment property that generated taxable income may be deducted. The cost of commissions and other related fees to dispose of the stock are not deductible but should be accounted for in calculating the gain or loss from the sale or disposition of the securities.

A dealer will differ from an investor in that a dealer will purchase and hold securities for their customers and conduct these activities in the ordinary course of the dealer’s business. The dealer may hold an inventory of securities. The dealer will make their money and income by marketing securities to their clients. A dealer will report gains and losses from the disposition of securities by applying and using market-to-market rules.

Apart from being designated as an investor or dealer, special rules can apply when you are determined to be a trader in securities. In short, a trader would be considered to be in the business of buying and selling securities for your own account. Under certain circumstances you could be considered to be a business even if you do not hold an inventory and maintain customers. The IRS could consider you to be in business as a trader in securities if you meet the following conditions:

The activity is substantial;

You are attempting to profit from daily market movements if the pricing of securities and not so much from appreciation, interest or dividends; and,

The activity is practiced with continuity and regularity.

If you are a trader in securities you can report your income and expenses on a Schedule C with your 1040 and thus Schedule A limitations would not apply, and further, the gains and losses from selling securities are not subject to self-employment tax.

Is the money I receive in a lawsuit settlement taxable? If you have received money via a lawsuit settlement, you may be asking yourself this exact question. Perhaps you were injured in a car accident, or filed suit against a prior employer for wrongful termination and are now receiving a monetary settlement. The settlement may or may not be taxable depending upon all of the facts and circumstances surrounding your case. The article below has been prepared by a tax attorney to provide additional information relating to whether or not proceeds from a lawsuit settlement need to be included in gross income on your individual income tax return. Please remember, this article is for informational purposes only, and should consult your tax attorney or tax advisor regarding your specific facts and circumstances.

If your lawsuit settlement was the result of personal injuries and/or personal sickness you do not need to include the settlement amount, or that portion in your gross income as long as you did not take an itemized deduction of the medical expenses. If you did previously take an itemized deduction of the medical expenses in prior years (this would likely be taken on a Schedule A) you must include the portion that was deducted and provided a benefit in prior years in your income.

Ok, so what about settlement awards and amounts for emotional distress and/or mental anguish? If the award or settlement was for emotional distress or mental anguish that originated from personal injury or personal sickness, the proceeds from the settlement would not be taxable and thus not need to be included in your gross income. However, if you receive a settlement amount for emotional distress or mental anguish that did not originate from personal injury or personal sickness, that portion or amount of the settlement is taxable, and thus would be included in your gross income. If a portion of your settlement is taxable as emotional distress or mental anguish, the amount can be reduced by the amount that you paid for other medical expenses that are attributed to the emotional distress or mental anguish and that have not been previously deducted and medical expenses you previously deducted for the emotional distress and mental anguish that did not provide an actual tax benefit

What about non-personal injury type settlements? What about a settlement for lost wages or lost profits? If you receive money via a settlement for last wages, not only is the amount taxable and included in gross income, but the settlement amount is also subject to self-employment tax. For example, if you sued a prior employer for discrimination or involuntary termination and requested lost wages, and won a settlement, the portion received for lost wages should be included in income and subject to self-employment tax. If you filed a suit against a third party for lost profits and received a settlement for lost profits, the proceeds would be taxable, and would included in your business income. It may depend upon the business structure, plaintiffs in the suit and other related issues as to the further taxation of those settlement proceeds for lost business profits.

What about settlement proceeds for lost property? Typically, if the proceeds received for lost property do not exceed your adjusted basis in the property, then the proceeds would not be taxable, but rather would reduce your basis in the property. However, if the amount received was in excess of your adjusted basis, the amount in excess is income.

What if you are paid interest on the settlement amount? Generally, the interest would be taxable, and would included like normal interest from a savings account.

The above article has been prepared by John McGuire of the McGuire Law Firm. John is a tax attorney and business attorney in Denver, Colorado. Please feel free to contact John directly with any questions, comments and concerns.

How and when do criminal tax investigations begin? Many people have heard of persons being criminally indicted or charged with tax-based claims for failing to pay tax or failing to file tax returns, but how does the government begin or initiate the criminal tax process? The article below has been prepared by a tax attorney to provide additional information regarding these questions and issues. Please remember this article is for informational purposes and you should consult your tax attorney or a criminal attorney with your specific questions.

The Internal Revenue Service has a Criminal Investigation Division that conducts criminal investigations relating to alleged violations of not only the Internal Revenue Code, but also the Bank Secrecy Act (BSA) and certain money laundering statutes. The investigators will then provide their findings to the Department of Justice for recommended prosecution.

The information that will lead to a criminal investigation can be obtained by the Internal Revenue Service in many ways. Perhaps an individual owed tax to the IRS or was being audited by the IRS and the IRS revenue officer or revenue agent noticed issues that appeared illegal, fraudulent or felt the matter needed further review. The revenue officer or revenue officer could refer the case or issues to the Criminal Investigation Division. Oftentimes, information could be received by the public such a disgruntled employee, ex-spouse or other whistleblower. Furthermore, the IRS may obtain information from other law enforcement agencies whether federal, state or local that could inevitably lead to the initial criminal investigation.

Once the criminal investigation has begun, Special Agents will analyze the information to determine if criminal tax fraud or some other financial crime may have occurred. The preliminary investigation is often referred to as the “Primary Investigation.” A supervisor of the Special Agents will review the initial information and make a determination as to approve the case for further review and development. If the supervisor approves, approval can be obtained from the head office and the Special Agent in charge will initiate a Subject Criminal Investigation. At this point, the investigation would be considered open and ongoing as the Special Agent will work to further obtain facts and evidence needed to establish the necessary elements for criminal activity. The information, facts and evidence can be obtained in various ways from various sources such as third-party interviews, search warrants, surveillance, subpoenaing bank records, related financial records & tax returns and reviewing any other financial or asset related documentation. Generally, the Special Agent will work with a criminal tax attorney within the IRS Chief Counsel in an attempt to ensure certain legalities are maintained during the course of the investigation.

At what point is there a charge or prosecution? Once all evidence has been gathered and analyzed, the Special Agent and their supervisor will make a determination that the evidence does or does not equate to criminal activity. If the evidence does not substantiate criminal activity and charges, the investigation is discontinued. If the determination is that the evidence would substantiate a criminal charge and thus prosecution recommended, the Special Agent would move forward with preparing a special agent report. The special agent report would thereafter be reviewed by multiple parties such as supervisors, review teams etc.

Upon this “final review” if the Criminal Investigation Division determines a criminal prosecution is warranted, the division will recommend prosecution to the Department of Justice(Tax Division) or United States Attorney. Generally, the Tax Division of the Department of Justice will prosecute the matter if it is a tax investigation, and the United States Attorney would prosecute for other investigations.

If you have been contacted by an IRS Criminal Investigator or know of an ongoing investigation of which you are a witness or target, it is highly recommended you contact a tax attorney or criminal tax attorney.

Can the Internal Revenue Service really impact my ability to travel? If you owe taxes to the Internal Revenue Service, especially “seriously delinquent tax debts” the answer is yes, the IRS can impact your travel plans by impacting your passport as discussed below.

In January of 2018, the Internal Revenue Service announced it will implement new procedures that could impact an individuals ability to obtain or maintain a passport. The IRS stated these new procedures will impact those individuals that have “seriously delinquent tax debts.” Under the Fixing America’s Surface Transportation (FAST) Act, the IRS is required to notify the State Department of certain taxpayers owing seriously delinquent tax debts. The FAST Act also requires the denial of passport applications, renewals of passports and in some cases even the revocation of an individual’s passport.

So what constitutes a seriously delinquent tax debt? Generally, the IRS has defined a seriously delinquent tax debt as someone who has a tax debt to the IRS of more than $51,000. The $51,000 threshold would include tax, penalty and interest for periods whereby the IRS has filed a Notice of Federal Tax Lien or issued a levy, and the taxpayer can no longer properly challenge the lien or levy action.

If you are taxpayer with a seriously delinquent debt to the IRS, you can likely avoid the IRS contacting the State Department by taking the following action(s).

Pay the debt in full;

Paying a settlement amount through a tax settlement or offer in compromise with the IRS;

Paying the tax debt through a formal settlement with the Department of Justice;

Suspending collection action by the IRS through an innocent spouse claim; or

Requesting a Collection Due Process Hearing with a levy.

A taxpayer under the following situations should not be at risk for having their passport rights impacted.

The taxpayer has filed and is in bankruptcy;

Is an identity theft victim;

The taxpayer’s account has been determined non-collectible by the IRS;

The taxpayer is located in a federally declared disaster area;

The taxpayer has a pending installment agreement with the IRS;

The taxpayer has a pending offer in compromise with the IRS; or,

The taxpayer has an adjustment that with satisfy the IRS debt in full.

In short, to prevent any passport issues if you owe taxes to the IRS, if the tax debt is being addressed, your likelihood of having a passport application denied or a passport revoked is severely lessened.

What is an abusive tax scheme? You may have heard of a program or scheme that promises to eliminate or substantially lessen your tax burden and taxes due to the Internal Revenue Service. A promoter of such a scheme is likely to use financial instruments such as a trust and/or pass through entities such as a limited liability company or limited partnership. When these programs and schemes are used improperly and to facilitate tax evasion, IRS may criminally investigate the scheme and prosecute the promoters as well as investors. You should remember that if something sounds too good to be true, it could be, and could lead investigation by the Internal Revenue Service and potential criminal tax charges. It is recommended that you discuss any potential tax scheme or program with a tax attorney. The article below will provide more information regarding abusive tax schemes, but this article is for informational purposes only, and please always discuss your specific issues with a tax attorney.

Overtime tax schemes have developed from relatively simple single structure arrangements into more complex and sophisticated overall schemes and strategies that take advantage of foreign jurisdictions and financial secrecy laws. The Internal Revenue Service Criminal Investigation has a national program to fight these illegal tax schemes and programs and prosecute violators with criminal tax charges. Our government has and will continue to criminally prosecute the promoters of illegal tax schemes and those who play substantial roles in aiding or assisting the tax scheme, which could include investors into the tax scheme. The biggest question when initially looking at these issues is, what constitutes an abusive or illegal tax scheme and could lead to criminal tax evasion and criminal tax charges? In short, an abusive tax scheme that could lead to criminal matters would violate the Internal Revenue Code and related federal statutes. Furthermore, generally the violations of the federal tax law and related statutes would use domestic or foreign trusts as well as pass through entities such as partnerships as vehicles in violating the federal tax laws. In recent years, foreign bank accounts and other financial accounts have been used more frequently to accomplish tax evasion because of reporting issues (one may refer to FATCA for further information). Many foreign banks and financial institutions do not report income such as interest and dividends, and thus there is no record of the income to the trust, entity and individuals. With no reporting to the federal government, and no reporting on applicable tax returns, the income goes unreported.

As stated above, foreign accounts or trusts may be used frequently in illegal tax schemes. A common scheme that may have many variations may flow as follows. A United States citizen has a business in the United States and also forms a foreign corporation and foreign bank account in the same name of their US business. When checks are received, the checks are processed through the foreign business and foreign bank account. The foreign account will likely be in a foreign jurisdiction that does not report income and related items to the US government. Thus, the income goes unreported on the taxpayer’s tax return and there are no 1099s issued to the US government to have any knowledge of the account and thus income going into the account. Some schemes will involve a foreign business that issues invoices to a United States business. The invoices are paid to the foreign business and a deduction taken by the US business, but the income of the foreign business is not claimed. The business are commonly owned and the US citizens involved are not claiming the income of the foreign business. Again, we have unreported income into a foreign account, and likely interest and/or dividends in a foreign account that would not be reported. The above examples could go many more layers deep, but provide good examples as to how an illegal tax shelter or abusive tax scheme could be established.

The above article has been prepared by John McGuire of the McGuire Law Firm for informational purposes, and should not be relied on as legal advice. Mr. McGuire is a tax attorney, representing individuals and businesses before the Internal Revenue Service and can be contacted directly through the McGuire Law Firm.

For many individuals, the Streamlined Offshore Voluntary Disclosure Program provided welcome relief in comparison to the “initial” Offshore Voluntary Disclosure Program. Many taxpayers with foreign accounts and assets contact wonder what forms and documents must be filed to apply for the Streamlined Offshore Voluntary Disclosure Program. In general, taxpayer’s must file the necessary FBARs, amend the necessary 1040s (1040X) and Form 14654. Further, based upon the facts and circumstances, other forms may not be prepared and filed. You should always discuss your requirements with your tax attorney and/or other tax advisors. The video below has been prepared to provide additional information regarding the forms filed with the streamlined program. You can contact The McGuire Law Firm to discuss your issues directly with a tax attorney.

When an offer in compromise is submitted to the IRS, the IRS may agree that the taxpayer is an offer candidate, but not agree with the original offer in compromise amount. Thus, can the initial offer in compromise be amended? Yes, the offer can be amended to reflect a different amount and terms.

This issue is discussed in the video below by John McGuire, a tax attorney at The McGuire Law Firm.

Non-willful conduct is required under the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP). If the failure to report foreign bank accounts and/or foreign financial assets was non-willful, you may be subject to a lower penalty base. The key question is, what constitutes non-willful actions by a taxpayer? Generally, the IRS would consider non-willful to mean the conduct or failure to properly report was due to a mistake, negligence or based upon a good faith misunderstanding of the law. Perhaps an understandable lack of knowledge may lead to non-willful conduct.

The video below also provides a short explanation of non-willful conduct, which of course is based upon the facts and circumstances of each case. Please remember to consult with your tax attorney directly if you have questions relating to FATCA, FBAR filings and/or other foreign tax compliance issues.

You can contact The McGuire Law Firm to speak with a tax attorney regarding your issues.